Time-Varying Neutral Interest Rate—The Case of Brazil

Author/Editor:

Roberto Perrelli ; Shaun K. Roache

Publication Date:

May 12, 2014

Electronic Access:

Free Download. Use the free Adobe Acrobat Reader to view this PDF file

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

Emerging markets have experienced a sizeable decline in their neutral real interest rates until recently. In this paper we try to identify the main factors that contributed to it, with a focus on Brazil. We estimate an interval for Brazil’s time-varying neutral rate based on a range of structural and econometric models. We assess the implications of incorrectly estimating a time-varying neutral rate using a small structural model with a simple monetary policy instrument rule. We find that policy prescriptions are very different when facing uncertainty of neutral rate and of output gap. Our result contrasts sharply with Orphanides (2002), suggesting that the best response to neutral rate uncertainty is to ensure policy remains highly sensitive to inflation and output variations.

Series:

Working Paper No. 2014/084

Subject:

Central bank policy rate Financial services Inflation Output gap Potential output Prices Production Real interest rates

English

Publication Date:

May 12, 2014

ISBN/ISSN:

9781484385210/1018-5941

Stock No:

WPIEA2014084

Pages:

32

Please address any questions about this title to publications@imf.org